Sure Retirement - Welcome to Sure Dividend - Sure Dividend

Sure Retirement Newsletter

HIGH-YIELD, HIGH-QUALITY INVESTMENTS

June 2018 Edition

By Ben Reynolds, Nick McCullum, & Bob Ciura Edited by Brad Beams

Published on June 10th, 2018

2

Table of Contents

Opening Thoughts - What Drives Pipeline MLP Value? -........................................................ 3 The Retirement Top 10 ? June 2018 ........................................................................................... 4 Analysis of Top 10 Securities ....................................................................................................... 5

Buckeye Partners LP (BPL)........................................................................................................ 5 Owens & Minor Inc. (OMI) ........................................................................................................ 7 Sunoco LP (SUN) ....................................................................................................................... 9 Invesco Ltd. (IVZ) .................................................................................................................... 11 AT&T Inc. (T) .......................................................................................................................... 13 Energy Transfer Partners LP (ETP) .......................................................................................... 15 Altria Group Inc. (MO)............................................................................................................. 17 Omega Healthcare Investors Inc. (OHI) ................................................................................... 19 R.R. Donnelley & Sons Co. (RRD) .......................................................................................... 21 Enterprise Products Partners LP (EPD) .................................................................................... 23 Closing Thoughts ?Dividends & Capital Gains?..................................................................... 25 List of Investments by Sector..................................................................................................... 26 List of Investments by Rank ...................................................................................................... 29 List of Past Recommendations & Ranking Criteria ................................................................ 31 Portfolio Building Guide ............................................................................................................ 33 Examples................................................................................................................................... 33 Tax Guide .................................................................................................................................... 34 Corporations.............................................................................................................................. 35 Master Limited Partnerships (MLPs)........................................................................................ 36 Real Estate Investment Trusts (REITs)..................................................................................... 37 Business Development Companies (BDCs) ............................................................................. 38 Glossary of Common Terms & Acronyms ............................................................................... 39

3

Opening Thoughts - What Drives Pipeline MLP Value? -

Oil pipeline MLPs often rank in the Top 10 of The Sure Retirement Newsletter. A disproportionate amount of focus for pipeline MLPs is put onto their legal structure instead of what really drives value ? the underlying business and assets.

Pipeline MLPs transport oil, gas, and refined products from the point of production to the point of distribution. These MLPs make money by charging oil producers a fee for using their pipelines. Fees are typically charged either on `pipeline capacity reservations' - which do not depend on the amount of oil that goes through the pipeline - or charged based on actual throughput.

Pipelines have a significant advantage over competing oil transportation choices. Estimates of the cost to transport a barrel of oil for competing transportation sources are below1:

? $5 by pipeline ? $10 to $15 by rail ? $20 by truck

Pipelines are the most efficient way to transport oil. With that said, they are often the slowest, require the most capital in advance, and are the least flexible. Still, pipelines provide a significant cost advantage over competing transportation choices for energy companies. Economies tend toward efficiency, making pipelines a valuable asset in the U.S. economy.

Like utilities, rails, and roads; pipelines enjoy a partial geographic monopoly. When a pipeline connects point A to point B, it makes little economic sense to build a competing pipeline and compete on price. Additionally, pipelines remain in operation for decades. Most are designed to have operational lives of ~50 years.

Simply put, the value of any specific pipeline is the sum of its future cash flows discounted back to present value. With long operating lives, partial geographic monopolies, and a clear economic incentive (lowest distribution cost) for their use, pipelines are likely to generate strong cash flows for decades.

MLPs typically have high yields and pay out the bulk of their cash flows as distributions to unitholders. This is good news for income investors as they typically get the lion's share of cash which pipeline assets generate.

This leaves little money left to grow (build new pipelines). Similar to REITs, MLPs typically tap debt and equity markets to fund growth. This means pipelines seek to find the cheapest source of capital available and build projects with higher rates of return. The difference between cost of capital and return on the investment is what creates value for unitholders on top of distributions.

The pipeline MLP sector has experienced significant volatility recently. Understanding the economic value embedded in these entities will be very helpful in deciding to keep their securities in your portfolio through any additional volatility moving forward.

1 Pipelines Rail & Trucks, page 3

4

The Retirement Top 10 ? June 2018

Name

Buckeye Partners (BPL) Owens & Minor (OMI) Sunoco (SUN) Invesco (IVZ) AT&T (T) Energy Transfer Partn. (ETP) Altria Group (MO) Omega Healthcare (OHI) R.R. Donnelley & Sons (RRD) Enterprise Products (EPD)

Type Price

MLP $36 Stock $16 MLP $26 Stock $28 Stock $34 MLP $19 Stock $58 REIT $31 Stock $7 MLP $29

Fair Value

$53 $29 $38 $41 $46 $25 $65 $37 $11 $35

Yield Payout Growth2 Beta

13.9% 6.5% 12.6% 4.3% 5.9% 11.9% 4.9% 8.7% 8.5% 5.9%

110% 52% 82% 44% 58% 87% 74% 85% 62% 67%

6.0%

8.0% 4.7% 6.0% 4.7% 3.0% 7.0% 4.5% 5.0% 3.0%

1.97 1.84 1.84 0.83 0.40 1.85 0.80 0.06 -1.36 1.17

Notes: The `Price' column shows a recent price of the security. The `Fair Value' column shows our estimate of the company's per-share fair value. True fair value is unknowable. The `Payout' column uses earnings, funds from operations, or distributable cash flow in the denominator. The numerator is the security's payment to its owner.

Two recommendations have changed from last month. Senior Housing Properties Trust (SNH) and Energy Transfer Equity (ETE) were replaced by Sunoco (SUN) and R.R. Donnelley & Sons (RRD). The stability of the Top 10 list shows the ranking method is consistent, not based on rapid swings. Remember: Securities that fall out of the Top 10 are holds, not sells.

Notes: Dividend or distribution yields are used for valuation in some of the individual company analyses below instead of price-to-earnings (P/E) ratios, which are not meaningful for MLPs and REITs. The ranking criteria for the Top 10 list and requirements for inclusion in The Sure Retirement Newsletter are derived from The 8 Rules of Dividend Investing and The Sure Analysis Research Database.

An equal weighted portfolio of the Top 10 has the following characteristics:

Payout Ratio: Dividend or Distribution Yield: Growth Rate:

72% 8.3% 5.2%

2 Growth estimates are our analyst forecasts from The Sure Analysis Research Database.

5

Analysis of Top 10 Securities

Buckeye Partners LP (BPL)

Key Statistics Ratios & Metrics

Distribution Yield:

13.9%

10 Year Distribution Growth Rate: 3.9%

Most Recent Annual Distribution Increase: 4.1%

Sector: Energy

Distribution History: 19 years of increases

Business Type: MLP

Ex-Distribution Date: 8/10/18 (est.)

Payment Date: 8/21/18 (est.)

Overview & Current Events Buckeye Partners is a midstream energy master limited partnership (MLP). Its operations include the storage and transportation of oil and gas. Buckeye has approximately 6,000 miles of pipelines and more than 135 liquid petroleum product terminals with over 176 million barrels of total storage capacity. Approximately 95% of EBITDA is derived from fee-based sources. Buckeye's pipelines and terminals are located in the East Coast, Midwest, and Gulf Coast regions of the U.S. It also has a significant international presence, with a 50% interest in VTTI.

In early May, Buckeye reported (5/4/18) first-quarter financial results. Revenue increased 21.7% to $1.18 billion, beating expectations by $275 million. However, adjusted EBITDA declined 5.7% from last year's quarter. Adjusted EBITDA rose 0.8% in the company's domestic pipelines and terminals segment thanks to strong volumes; but the Global Marine Terminals segment reported a 10% decline in segment EBITDA, reflecting weak storage demand. Segment utilization fell from 99% to 88% yearon-year. Overall, Buckeye's distributable cash flow fell 11% for the quarter.

Growth Prospects & Safety Buckeye's growth will be fueled by new projects. For example, Buckeye recently acquired the remaining 20% of the Gulf Coast regional hub, which includes a Corpus Christi terminal. Buckeye initially spent $860 million to acquire an 80% stake in the project. Separately, Buckeye also closed an agreement with BP to support a 480 million-barrel expansion of its storage capacity in Chicago.

Another project set to ramp up is the Michigan/Ohio expansion project, for which the partnership has secured 10-year commitments from customers totaling 50,500 barrels per day. Phase two of the project should be completed by 2019 and is projected to add 40,000 additional barrels per day of capacity.

Buckeye's distribution safety has deteriorated over the past year. Buckeye reported a distribution coverage ratio of 1.0 for 2017, but coverage fell to 0.91 in the first quarter. This means the company did not generate enough distributable cash flow to pay its distribution in the first quarter. Importantly, Buckeye's CEO recently stated, "our Board of Directors remain committed to our current distribution policy" and "we have no intention of cutting Buckeye's distribution."

Valuation We expect Buckeye will generate EBITDA-per-unit of $6.77 in 2018. As a result, the stock trades for a price-to-EBITDA ratio of just 5.4. This is a low valuation, which indicates a high level of negative sentiment, as does the 13%+ yield. Over the past five and ten years, Buckeye had an average distribution yield of approximately 7%. We estimate a fair value price of $53 for Buckeye units.

With a low valuation and extremely high dividend yield, the total return potential for Buckeye is quite attractive here. We believe the stock could generate returns of 3%-4% from valuation changes each year, along with 5%-6% annual EBITDA growth. Combined with the 13.9% yield, total annual returns could reach 22% per year for Buckeye investors.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download